Haig Barrett, a life sciences management consultancy based in Plano, Texas, has worked with numerous organizations over the years as they set out to make acquisitions and the subsequent integrations successful. In this article, based on a talk delivered at CPhI North America, we discuss five M&A topics we think will be helpful and of interest.
To understand 2017’s trendline, we must first look back to the beginning of 2016. The year was expected to continue the megadeals of 2015. In fact, 2016 was expected to be the largest year of deal-making in the history of the pharmaceutical industry. But by the end of 2016, it seemed as if the year might be better described as a pivot point.
The year 2016 will likely be best remembered for the deal that did not happen. The year was expected to see the biggest deal in pharmaceutical history finalized—Pfizer and Allergan agreeing to combine for $160 billion. By merging under the Ireland-based company, Pfizer would have been able to avoid paying US taxes on $128 billion in profits stored overseas.
However, in a move to crack down on inversion deal-making, the US government changed the law to limit the benefits of “serial inverter” companies that have acquired multiple US firms over a short period of time. The Pfizer and Allergan deal immediately fell apart, along with other large inversion-based deals that were in the works.
With large inversion-based deal-making curtailed, 2016 deals primarily served to strengthen pharmaceutical companies’ positions in areas of strategic strength, acquire innovative capabilities, and divest businesses no longer of strategic fit.
President Trump has advocated for policies that would allow US companies to repatriate monies currently overseas, and a move of this nature would almost certainly create financial incentives for M&A activity outside of portfolio strengthening. However, although in discussion, these policies have not yet materialized and the whole of 2017 will almost certainly continue 2016 trends.
Q1 – Q3 2017 Life Sciences M&A Activity
The value of global pharmaceutical, medical device, and biotech M&A fell nearly 10 percent the first three quarters of 2017 when compared to the same period in 2016. Additionally, deal counts were fewer by approximately 106. The year-over-year global life sciences sector declines were even notable in the US, dropping 23 percent in value and resulting in only 625 deals.
2017 has continued the strategic portfolio strengthening trend of 2016 best illustrated by the nearly $30 billion acquisition of European biotech company Actelion Pharmaceuticals by Johnson & Johnson and the $10.2 billion pickup of CAR-T biotech firm Kite Pharma Inc. by Gilead Sciences Inc. Both of these deals were very strategic portfolio-building moves and not driven by attempted cost savings or macro financial incentives like inversion opportunities.
Most research indicates that only 40 to 60 percent of mergers succeed.2 What exactly is a successful merger, and why aren’t there more success stories? Generally, a merger is considered successful if the resulting company achieves the strategic intentions driving the merger when the deal was announced. Regardless of the strategic imperative, it has been our experience that the most successful mergers recognize that true long-term value is found in the white spaces within and between key value-creation functions (product development, sales and marketing, and supply chain), while less successful mergers tend to focus too much attention on back-office integration, cost control, and systems consolidation.
When working to help our clients ensure that the strategic objectives of the deal are achieved, Haig Barrett has had a lot of success with a two-team approach, with both teams ultimately reporting to an integration team leader.
Internal Team: This team takes an internal perspective and is responsible for day one execution and synergy capture (cost reduction) related to human resources, legal, finance and accounting, and information technology. A key role of this team is avoiding employee defections and managing employee communications.
External Team: This team takes an external/customer-focused perspective and is responsible for maximizing the value contribution (revenue and profit) of the product development, sales and marketing, manufacturing, and supply chain organizations. A key role of this team is avoiding customer defections and managing external customer communications.
The External Team should be formed to specifically focus on leveraging the synergies within and between the value-creation assets entrusted to the newly combined organizations. Revenue increases during a merger are always more difficult to achieve and take longer than expected.
Don’t underestimate the degree to which competitors will seek to poach your best customers and your best sales people, as your team develops strategies to address the following:
To what degree do we need to rationalize the existing portfolio of development projects? Can we establish common platforms for existing products?
How do we best combine our teams to increase efficiency, fully leverage new capabilities, and improve innovation?
How can we consolidate our sales force to remove overlap yet improve customer retention and sales?
Marketing & branding
How do we enhance and project our brand(s)? To what extent, and when, do we combine or shift our brands? What messages do we want our customers to hear during the merger integration?
When and how do we introduce new capabilities? To what degree can we consolidate, and how do we make this seamless for our customers?
To successfully integrate two companies, the approach must be consistent with the strategic intent. Guiding principles, priorities, and governance must reflect the logic behind the merger. A well-defined integration strategy should clearly articulate both financial and nonfinancial goals, as well as risk-mitigation strategies.
The following areas of focus are foundational to the ultimate success of an acquisition.
Solid corporate governance process
Comprehensively linking strategic intent to principles, processes, people, measurements, and communications is challenging at the level of one company. Introducing a second company and stakeholder group to the mix multiplies these complexities. Decision-making authorities and approaches must be well defined. Cross-functional coordination, not only in the timing and execution of merger tasks, but also in the timing and consistency of communications to customers, employees, and suppliers, is critical.
Bringing disparate groups of people together from different companies may be more difficult than it sounds. Subtle differences in language, decision-making, performance measurements, incentives—“culture”—can translate into major differences in expectations and behavior. Addressing these differences takes real work on the front end of any merger and throughout the integration period.
Allowing differences to “resolve themselves over time” is a recipe for failure.
Appropriately resourced integration team
Selecting the right individuals to lead the integration effort is essential. Those you choose will need to move quickly and make tough decisions based on limited information, yet remain sensitive to the needs and concerns of customers and employees from both companies. Although most of the organization should remain focused on running the existing business, full-time resources must be dedicated to the merger integration effort. Furthermore, incentives for the integration team and adjacent leaders critical to the integration should be implemented and equitably aligned across the organization.
Internal ownership vs. external assistance
A central issue in the integration process is to find the right balance between internal and external resources to ensure success.
We believe it is imperative to have your people take ownership and responsibility for the success of the merger. A consultant’s role is to help your people succeed. They should provide objectivity and practical experience in aligning the integration strategy with the merger’s strategic intent and an organization’s capabilities, honest evaluation and guidance regarding cultural and leadership challenges, cross-functional orchestration, continuous review of risk and risk mitigation strategies, and a persistent focus on maximizing merger synergies.
Fewer, more senior-level consultants can provide the coaching and guidance needed (and address management bandwidth issues), whereas a small army of more junior-level consultants can overwhelm your team with endless task lists, stretching them thin, distracting them from running the day-to-day business, and increasing the risk that bigger picture issues go unaddressed.
Appropriate & aligned performance expectations
Setting and aligning performance expectations begins well before the acquisition transaction even closes. As the acquirer builds its valuation model and identifies both revenue and cost synergies, expectations are being quantified and bought into by leadership.
Successful acquirers evaluate the financials both from an acquisition justification perspective and how they will operate the business once acquired. Performance expectations developed and established in this process enhance the likelihood of a successful acquisition.
The most successful players invest in their reputations. If your company is in the mode to acquire, you will be well served to strategically manage your reputation. If you are perceived as actively interested in acquisitions and ready to move, your path to secure acquisitions will be easier. To make the acquisition path even smoother, make sure that your company, in perception and reality, is a company another organization would like to join.
Your position as an acquirer should reflect a clear purpose so companies know what you are looking to add to your portfolio. You may be looking for new products, but you also may be seeking companies with a reputation for innovation to add robustness to your R&D capabilities.
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With over 25 years of experience, Haig has accumulated a wealth of knowledge and experience in global business leadership and strategic facilitation and planning. Over the last 15 years, Haig has built Haig Barrett into a leading consulting firm with clients ranging from chemicals, automotive, energy, pharmaceutical and biotech sectors. Prior to founding Haig Barrett, Haig has led divisions for leading global Fortune 50 corporations including Rio Tinto. Haig graduated with a B.Sc. Honors in chemical engineering from Surrey University, England.